Public Finance: Taxation
Intro
Western University
September 5, 2024
What is Public Finance?
- Field of Economics studying government revenue, expenditure, and debt, and how these influence the economy.
- Governments raise revenue through taxes to fund public services
- Both affect the behavoir of economic agents (consumers, firms),
- Alter the structure and functioning of markets
- Influence economic growth
- Redistribute income across individuals
- Focus of the course: Microeconomic (individual behavior) and Normative (how things should be; Positive: how things are)
Current Global Fiscal Policy Debates
- Taxation of Digital Economy: How to tax multinational tech companies that operate across borders.
- Climate Change Financing: Debates on funding climate initiatives through taxes or government spending.
- Wealth Inequality: Discussions on progressive taxation to address rising wealth disparities.
- Sovereign Debt Management: Strategies for managing and reducing national debts, especially post-COVID-19.
Taxation of Digital Economy
Figure 1: There is a geographic mismatch between the location of individuals who use digital platforms and the location where those products are developed.
Taxation of Digital Economy
- Unlike traditional companies, whose profits are taxed at value creation, digital technology companies conduct most transactions electronically.
- This makes it challenging to capture where value is created, what it is, and how to measure it.
Taxation of Digital Economy
- Additionally, companies are taxed through permanent establishment rules, which are largely based on physical presence.
- So, while digital technology companies operate virtually all over the globe, their profits are taxed only in the state where they have a physical establishment.
- What economic effects might this have?
Digital Service Tax (DST) in Canada
- The Digital Services Tax will be effective the 2024 calendar year
- The DST is a 3% tax on Canadian‑source digital services revenue earned by large domestic and foreign taxpayers
Digital Service Tax (DST) in Canada
- In‑scope revenue would generally be comprised of Canadian-source digital services revenue arising from:
- online marketplace services
- online advertising services
- social media services
- the sale or licensing of user data obtained from an online marketplace, a social media platform or an online search engine
Canada’s Fiscal Policy and Taxation Issues
- Tax System Overhaul: Calls for a comprehensive review of the Canadian tax system, last overhauled in 1967, to simplify and ensure fairness in taxation.
- Carbon Pricing: Ongoing debates around the effectiveness and fairness of carbon pricing mechanisms in reducing emissions and their economic impact.
- Tax Avoidance and Evasion: Increased focus on combating aggressive tax avoidance, particularly involving offshore entities and digital currencies.
Canada’s Fiscal Policy and Taxation Issues
- Transfer Pricing: Scrutiny of cross-border transactions to ensure fair taxation of multinational corporations operating in Canada.
- Public Debt Concerns: Managing rising public debt and interest payments, especially in light of increased government spending on social programs and infrastructure.
Canadian Issue: Carbon Pricing
Canada’s carbon pricing system is a cornerstone of the country’s plan to tackle climate change.
However, it faces criticism regarding its economic impact, fairness, and effectiveness in reducing emissions
Conservative Leader Pierre Poilievre argues against the carbon tax saying it makes current inflation worse
What is the Carbon Pricing (Tax)?
There are two systems for pricing carbon in Canada: the fuel charge applied to consumers, and another system applied to industrial emitters.
The April 1 (last) increase amounts to about three cents more per litre of gasoline.
By 2030, though, the price on carbon would add nearly 40 cents per litre
The gradual increases are meant to act as a financial incentive for people and businesses to change their behaviour to burn less fossil fuels and transition to greener forms of energy.
- Switch from a gas-powered vehicle to an electric.
Does the Carbon Tax Work?
Does the Carbon Tax Work?
A recent study estimates the the fuel charge will contribute between 8 and 9 percent of avoided emission by 2030
The industrial-emitter carbon pricing will contribute between 23-39 percent
Data released in by the Federal Government shows, however, by 2030 the reduction in emissions is expected to be 12 per cent below what emissions would be without carbon pricing
On the economic side, by 2030 Canada’s GDP will be $25 billion lower that it would have been without carbon pricing
Carbon Rebate
The carbon tax applies to residents in Newfoundland and Labrador, New Brunswick, Nova Scotia and Prince Edward Island, Ontario, Manitoba, Saskatchewan, Alberta, Yukon and Nunavut.
Ninety per cent of the government revenues are returned to households in those provinces through a quarterly rebate program, with households receiving a quarterly payment based on family size.
Carbon Rebate
How Carbon Pricing Works
How Does Canada Tax Code Rank?
International Tax Competitiveness Index
The Tax Foundation’ s International Tax Competitiveness Index (ITCI) measures the degree to which the 38 OECD countries’ tax systems promote competitiveness
The ITCI attempts to display not only which countries provide the best tax environment for investment but also the best tax environment for workers and businesses.
Canada ranks 15 in the OECD
Figure 2: Canada’s Rank at the International Tax Competitive Index
Sources of Revenue
Corporate Taxation
The corporate income tax is a tax on the profits of corporations.
Consumption Taxes
Consumption taxes are charged on goods and services and can take various forms.
In the OECD and most of the world, the value-added tax (VAT) is the most common consumption tax.
Consumption Taxes
